Analysis of disputed jurisdiction between arbitration and court

Pursuant to article 5 of the Arbitration Law, where parties have reached a valid arbitration agreement and either of them institutes a legal action in court, the court will reject the same. This establishes the exclusive jurisdiction system for arbitration clauses. Nonetheless, in practice, there remain numerous disputes over jurisdiction between arbitration bodies and courts. For example, the authors recently discovered, in the judgment on a foreign-related equity dispute, that the court circumvented the constraints of an arbitration jurisdiction clause to “seize” jurisdiction. This column analyzes the application of arbitration jurisdiction clauses from the perspective of this case.

The equity transferee and the equity transferor, together with its actual controller, in the case executed an agreement (the actual controller held all shares in the transferor, and the transferor held all shares in the target company) which specified that any dispute that might arise in connection with the agreement and which could not be resolved through amicable consultations was to be referred to the China International Economic and Trade Arbitration Commission (CIETAC) for arbitration. However, there was a discrepancy between the way the transaction was ultimately carried out and the provisions of the agreement, resulting in the subsequent dispute over jurisdiction between arbitration and the court.

The transferee, deeming that the transferor failed to perform its attendant contractual obligations, instituted arbitration proceedings against the transferor demanding that the transferee be registered as the person in charge of the target company as agreed. The transferor, however, claimed that a condition precedent to registration was the payment in full by the transferee of the first four instalments of transfer moneys. Following the hearing by the arbitration tribunal, the award determined that the transfer moneys had been paid in full and upheld the transferee’s claim.